Disloyal Managers and Debt Structure

Luofan Bu, Jeffrey Ng, Byron Y Song*, Mark Yuzhi Yan

*Corresponding author for this work

Research output: Contribution to conferenceConference paperpeer-review

Abstract

Traditionally, the duty of loyalty demands that fiduciaries not pursue business opportunities that could benefit their own companies. Several states in the United States now allow companies to waive this duty, which increases the likelihood of an agency problem: that disloyal managers will appropriate business opportunities. Using a difference-in-differences research design, we find that the firms covered by corporate opportunity waiver (COW) laws shift their debt structure to bank debt relative to public debt. We infer from this finding that firms borrow relatively more from lenders that can better monitor the aforementioned agency problem. We also find that the shift is more pronounced for firms with more investment opportunities, those with CEOs who are more likely to appropriate the firm’s business opportunities, and those with weaker shareholder monitoring. With regard to equity market performance, we find that bank debt mitigates the adverse effect of COW adoption on shareholder wealth, and that the stock market reacts positively to COW-covered firms’ bank debt issuances.
Original languageEnglish
Number of pages51
Publication statusPublished - 6 Jul 2024
Event2024 Financial Management Association (FMA) Asia/ Pacific Conference - Yonsei University, Seoul, Korea, Republic of
Duration: 4 Jul 20246 Jul 2024
https://www.fma.org/2024Seoul
https://www.fmaconferences.org/Seoul/SeoulProgram.htm

Conference

Conference2024 Financial Management Association (FMA) Asia/ Pacific Conference
Country/TerritoryKorea, Republic of
CitySeoul
Period4/07/246/07/24
Internet address

User-Defined Keywords

  • corporate opportunity waivers
  • fiduciary duty
  • monitoring
  • debt structure
  • loan contracting

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